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Why Is Panama Succeeding And Nicaragua Is Failing?

1085 words - 4 pages

There are approximately one billion people living in extreme poverty worldwide. Paul Collier identifies this group of people as the ‘bottom billion.’ He identifies them in this manner because they are living in countries surrounded by economic and social conditions prevalent in the fourteenth century (i.e. civil war, diseases, social malaise, etc.) Meanwhile, the remaining five billion people live in countries experiencing unprecedented levels of economic growth and well being (Collier, p. 3-5). The objectives of this paper are as follows: 1) to identify two major positive factors and two major negative factors for economic growth, 2) to compare and analyze economic growth indicators for Panama and Nicaragua, and 3) to discuss three important lessons drawn from the economic growth experiences of these two countries.
Economic growth is one of the prime factors in the welfare of a country. To understand which factors would potentially stabilize and accelerate its rate of expansion is an important issue to policymakers in all countries. Technological innovation and labor specialization promoted by the liberalization of trade are two major positive forces in propelling economic growth. The worldwide spread of technology has fostered unprecedented advances in the quality life that have resulted in the enhancement of labor productivity and an increase in the production capacity of soveriegn states. This increase in a country’s production capacity will directly result in an immediate increase in GDP levels; thus, the country will exhibit economic growth. (Kenny, CH 7). Labor specialization emerges from the assumption that each country possesses a comparative advantage for the production, manufacturing, or supply of certain goods and services. Labor specialization generally arises from free trade and moves a country towards economic efficiency in the utilization of scarce resources. An increase in economic efficiency, in theory, will boost economic growth. On the other hand, bad governance and income inequality are two of the major impediments to economic growth. A fragile political system with limited checks and balances can certainly prevent a country from reaching its maximum sustainable level of production. A weak and corrupt government translates into lower incentives to increase productivity and would discourage future foreign direct investment (Collier, CH 5). Income inequality can also severely harm a country’s production function, and consequently, hinder economic growth. A decrease in disposable income and purchasing power, the inability of the poor to access credit, or the dearth of investments in human capital, are some of the effects of income inequality. By diminishing a certain socio-economic group within society to perform at its maximum level, we are holding economic growth below the maximum sustainable level.
In order to further understand the previously stated economic growth factors, we can use the experiences of Panama and...

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